Personal allowance and tax

jblore

Forgive my ignorance, could someone please explain to me how once you've gone over your personal allowance limit tax works?

Is it that (e.g. for basic rate), if you earned £1100 (of which £1000 is tax free), then that extra £100 would be taxed at 20%, so you'd get £80 of it?

Therefore it would be beneficial to put some of the interest-earning amount in an ISA to avoid the tax? However, with (cash) ISA returns so low, it is currently better to place that amount in a higher paying 'normal' account and just take the tax on the chin - because you would still be earning more?

I hope that makes sense. Thanks. 

Dazed_and_C0nfused

Are you specifically referring to tax on interest?

If so you need to have used both your Personal Allowance and savings starter rate before you can use the savings nil rate (aka Personal Savings Allowance).

How much taxable earnings, pension, rental income etc do you expect to have in the current tax year?  Basically all taxable income expect interest or dividends.

And have you applied for Marriage Allowance?

jblore

Dazed_and_C0nfused said:

Are you specifically referring to tax on interest?

Yes.
Fully used personal allowance (and not eligible for startings rate for savings) due to salary.
Not married.

I'm just trying to understand how it works and the best place to put savings (assuming holding in cash for a house purchase).

Dazed_and_C0nfused

If you can't use the savings starter rate and get the full £1,000 savings nil rate then yes, the tax rate on interest which falls within your basic rate band is 20%.

So if you had interest of £1,100 you would be taxed as follows,

£1,000 x 0% = £0.00
£100 x 20% = £20.00

masonic

Even if you do only get £80 of every £100 interest, if the rate on an equivalent ISA is more than 20% lower than a normal savings account, it would not increase the amount of net interest you would obtain. Therefore it is sometimes better to put your money in a higher paying taxable account. For higher rate taxpayers, there is a much higher hurdle, but for basic rate such a scenario is not uncommon.

Olinda99

Three advantages of ISAs (all things being equal interest-rate wise):

1. easy to transfer to different providers

2. in a fixed rate ISA you can always get at your money in an emergency - yes you might have to pay an interest penalty but with standard fixed rate accounts you are locked in for the term

3. your interest will always be tax-free (unless rules are change of course).

Daliah

Olinda99 said:

Three advantages of ISAs (all things being equal interest-rate wise):

........

3. your interest will always be tax-free (unless rules are change of course).

Whilst this true, it doesn't necessarily mean you get more interest in a cash ISA than in a non-ISA savings account. Particularly basic rate tax payers might end up with more money outside ISAs, even if their total annual interest is above £1,000


Example 1: annual interest for £20,000 total savings for HR tax payer:

• in 1.5% instant access: £300 gross. Net £300 if not other interest, net £180 if all interest on the £20k is above £500 allowance
• in best easy access ISA (1%): £200
• in 2.15% 1 year fix: £430 gross. Net £430 if no other interest, net £258 if all interest on the £20k is above £500 allowance
• in best 1 year fix ISA (1.76%): £352
• ===> ISAs worth it if £500 allowance already used up

Example 2: annual interest for £20,000 total savings for BR tax payer:

• in 1.5% instant access: £300 gross. Net £300 if not other interest, net £240 if all interest on the £20k is above £1,000 allowance
• in best easy access ISA (1%): £200
• in 2.15% 1 year fix: £430 gross. Net £430 if no other interest, net £344 if all interest on the £20k is above £1,000 allowance
• in best 1 year fix ISA (1.76%): £352
• ===> easy access ISA isn't worth it unless the saver expects to shortly become HR tax payer; same for 1 year fix, which is barely worth it otherwise.

In addition to above, taking out fixed term accounts might not be the best idea right now.

Pompeydave1967

I was thinking along the same question as rates are increasing nicely as of late. 

Putting large amounts into a decent 2 year fixed takes me well over the allowance but I’d rather grab the extra and pay tax on the rest.

Bigwheels1111

Rates need to hit 6% before I pay tax.😎
Thats if I understand the tax code and £17500 limit with the £5000 savings bit over tax code being tax free.

I hope they rise in the next 3 months before 1st pots reinvestment, it’s an ISA but will be pulled out for better interest rates  .

I think it will be a 1 year fixed as rates are moving daily. But if that 6 month fixed is still about I might hedge my bets.
2nd pots 4 months time, 3rd 9 months.
It takes about 3 weeks from boe base rate rise to get the best offers.
I don’t want any risk, a nice regular income be it monthly or yearly is for me.
3% is 6 times what I was getting last year and even with inflation and price rises I will stil be better off.

Albermarle

3% is 6 times what I was getting last year and even with inflation and price rises I will stil be better off.

So in May 2021 you were getting 0.5% and inflation was 2.1 % , so you were losing 1.6% in value.

Lets say in 3 months time you can get a savings account with 3% interest, but inflation will be around 7%, so you will be losing 4% in value, so more than double the loss.

I am afraid all the general excitement about waiting for better rates, will only make a small dent in the inflation issue.
Hopefully in 2023 , inflation will start to come down and the gap will narrow.

Eco_Miser

Bigwheels1111 said:

Rates need to hit 6% before I pay tax.😎
Thats if I understand the tax code and £17500 limit with the £5000 savings bit over tax code being tax free.

£5000 savings interest over Personal Allowance are tax free, provided your pensions, earnings and other non-savings, non-investment income total less than your Personal Allowance (normally £12570). If that's true, you can also get a further £1000 savings interest tax free like any BR taxpayer  (if you've the savings to generate £6000 savings interest).